If you’re looking to expand your sales into new markets, there’s one big question you need to ask: Do I build a direct sales presence or use a distributor? Each method has its own advantages and disadvantages, but we will build a strong case for using one method over the other in almost every case.
What is the difference between direct selling and distributors?
A direct sales presence means that your company creates, manages, and pays a sales team of one or more people in your target market.
An outside agent is any entity that sells your product for a service fee. One example is a salesperson, who sells your product for a percentage of the sale. A distributor is similar to a representative, except that they buy the product from your company and sell it directly to the end customer.
Is direct selling better?
For most companies expanding into new markets, especially international ones, hiring a distributor is a better decision—at least until there is enough market return to justify building a direct sales presence.
Certainly, there is one major advantage of having direct sales presence control. Being in control of the daily activities of your sales staff is attractive to most business owners. But this control comes at a high price. To get started, you would need to take the time to hire someone in that market, train them, and then provide them with sales and management materials if not office and equipment. These costs are prohibitive for most small businesses looking to expand internationally.
And there are more costs that we haven’t mentioned yet. Each market has its own unique laws, cultures, and habits that are essential to mastering if your company is to create successful sales. Japan is a classic example of a market with unique legal structures and business habits that, if not followed, guarantee the failure of any sales efforts. It’s hard to put an exact monetary value on this learning, but ask yourself this: Can you build, manage, and pay a sales team in a foreign country for at least a year while they learn things and generate no income?
What about the distributor? Is the distributor better for new markets?
Distributors are a cost effective way to successfully enter a new market. Here are some reasons:
- No Extra Expenses: Unlike managing your own sales force, a distributor will take care of hiring, managing, paying, and improving their channel. You only borrow their distribution, while they handle the maintenance.
- A channel created with local knowledge: A good distributor will already know all the laws and customs of the market you are entering. You don’t need to reinvent the wheel – you can use someone who already has valuable local knowledge.
- Understanding the Pricing and Buying Power of the Market: Along with knowledge of laws and customs comes knowledge about the most successful ways to price and market your product locally.
- Cost Effective: Since you won’t be paying for the above items, distributor relationships are affordable for small businesses trying to enter a new market.
Using a distributor has some downsides as well, but they can be minimized by building a good relationship with the distributor.
- Not Your People: You won’t be able to directly manage every step of the process. While it may make you nervous to lose some control of the sales process, you can manage the risk by building a transparent relationship with your distributor with constant updates and feedback from both parties.
- A distributor has many products to represent: It may not be the distributor’s top priority at any time, and you want to be sure that your product doesn’t get mixed up at the back of the line. Again, an established relationship with constant communication will ensure that your product gets the attention it deserves.
- Not a “turnkey” solution: You can’t just give your products to a distributor and expect success. You will have to manage the relationship. This takes time, but is still less expensive than trying to install a direct sales force from scratch.
So what do I do next?
If you’re not convinced a distributor would be better for your organization than creating a direct sales force, seek help from a consultant who has experience establishing a presence in new markets. The consultant can use his or her expertise to analyze your opportunity and recommend the best course of action.
Before you choose a distributor, you need to know….
Choosing the wrong distributor will set you up for failure. The wrong distributor simply won’t generate sales, and you will have wasted at least a year finding and building an unprofitable relationship.
There are certain things to look for in a distributor, and they are different for each market. The best thing to do is find a professional, who has experience in distributor relationships, and hire that professional to help you search for and select the right distributor.